Winding Down EU Banks: Latest Step Allows Government Veto

The euro zone’s dash towards banking union often seems like a steeplechase: governments have had to scale a series of legal hurdles at speed, as the clock ticked down. A new compromise on how to centralize control of failing banks, circulated on Monday, aims to dodge the latest legal obstacle—concerns that the plan would endanger control of national budgets.

The draft proposal–which will be discussed by European Union ambassadors on Tuesday—would give EU governments veto rights over any decision that required them to spend public money to wind down failing lenders.

The move follows sustained pressure from Germany and other countries, as well as an opinion from lawyers for EU states, which warned that the European Commission’s plan could endanger control of national budgets, contrary to EU treaties.

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EU leaders have pledged to agree a common strategy this year on how to wind down failing lenders. Bank resolution is the second leg of the region’s banking union project, which aims to sever the toxic link between weak banks and their governments. The first leg–a powerful new policeman for euro zone banks housed within the ECB–secured final approval from EU finance ministers last month.

However, the fear is that under that plan, a government could be forced to spend money winding down one of its banks against its will.

The latest proposal—drafted by Lithuania, which currently holds the EU’s rotating presidency—directly addresses that concern.

“No decision of the [resolution] board or the commission shall require a member state to provide extraordinary public financial support, unless a member state has…approved the provision of this support,” says the document, dated Nov. 4.

Under the previous draft, member states would have been allowed to veto decisions requiring the use of public funds—but only if they could offer a low-cost alternative.

The latest draft also defines more narrowly the powers that the new resolution board would be able to exercise, including the level of fines it could demand of banks that don’t comply with its rulings. That change comes after lawyers for EU states warned last month that the powers exercised by the board were too broad and would violate EU treaties.

Despite those concessions, the latest proposal leaves the main decision-making powers firmly in the hands of the commission, despite Germany’s opposition to the idea. A proposal last week by Lithuania that the European Council—the EU body representing member states—be made the main decision-making authority in the new regime won very little support beyond Germany, according to one EU official.

Still, with less than two months before the year-end deadline, and Germany lacking a government, time is tight. Jörg Asmussen, Germany’s man on the European Central Bank’s executive board, stepped up the pressure on Monday, calling for a “hasty agreement” among EU governments. The clock is ticking.

About Real Time Brussels

The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.